The Tempting Contingent Fee Case

Vol. 40 No. 2

The author is with the Law Offices of Garrett S. Flynn, LLC, West Hartford, Connecticut.

Eve Repentant is a magnificent marble statue in the Wadsworth Atheneum, an art museum located two blocks away from the U.S. District Court in Hartford. Poor Eve’s head is bowed; her shoulders are slumped; and a once-bitten apple, a symbol of her temptation and regret, lies at her feet near a coiled snake.

Too many lawyers are tempted to take complex business dispute cases on a contingency fee basis and wind up feeling like Eve.

This situation is very often avoidable. The best defense against temptation generally—knowledge—can also help a lawyer detect whether a potential contingency fee case has genuine merit rather than superficial appeal. Lawyers need to appreciate the various types of harm that can flow from taking a bad contingency fee case, recognize potential sources of temptation, and have a game plan for evaluating the actual quality of contingency fee cases before a particular one comes along.

A Blessing or a Curse

Excluding the types of cases in which contingency fees are illegal (state ethics rules vary, but these usually include domestic relations and criminal cases), contingency fee cases—as distinguished from cases with other fee arrangements—are neither good nor bad. Their quality depends on the particular merits of the underlying case.

Where a case involves clear liability and ample damages, contingency fee cases are wonderful for the plaintiff and the plaintiff’s lawyer. The pursuit of justice does not depend on how much money the plaintiff has. The lawyer is motivated to recover as much in damages as possible. Often, the lawyer earns substantially more than if the case had been pursued on an hourly basis—but the greater fee is fair compensation for the lawyer’s participation in the risk that the case might fail.

In cases in which liability is unlikely or damages are low in comparison with the cost of obtaining them, the contingency fee arrangement is harmful in ways that are both obvious and insidious.

A lawyer who takes an inferior contingency case will waste time that could have been spent more productively and profitably. A lawyer’s most painful source of regret after a contingency case fails is usually the realization that every minute spent on the case could have been spent on more promising cases or on relationships neglected during the lawyer’s absence.

In cases in which the lawyer advances expenses that will never be repaid, the financial consequences can be devastating. Jonathan Harr’s A Civil Action tells a compelling story of an attorney who doggedly pursued environmental claims and obtained substantial settlements but was forced to declare bankruptcy when debts for legal expenses could not be paid. Indeed, high expenses are common in business litigation, which usually requires electronic discovery, experts (sometimes on both liability and damages), multiple depositions, and the use of sophisticated media to explain complex facts persuasively.

A bad contingency fee case can destroy professional relationships. After a firm suffers a bad result in a contingency fee case, “productive” lawyers who bill on an hourly basis resent the “gamblers” who squandered firm resources unwisely. Associates who work long hours on a partner’s unsuccessful contingency fee litigation wind up with diminished prospects for partnership when the unprofitability of their work is weighed more heavily than its quality.

Bad contingency fee cases burden the courts and harass defendants. When a lawyer represents a plaintiff on an hourly basis, every invoice forces the plaintiff to consider whether further expenditures of legal resources will produce a better result. In a contingency case, those dynamics are absent. Because it is very difficult for a lawyer to withdraw from a filed case without client consent, a contingency fee lawyer may be compelled to continue working on a case long after it is apparent that it will produce an unsatisfactory outcome.

Bad contingency fee cases are notoriously difficult to settle. Often a plaintiff who bears none of the cost of pursuing a case will attend a settlement conference and reject a proposed resolution that is deemed fair by the neutral, the defendant, and the plaintiff’s own attorney. The plaintiff simply hopes that prolonging the litigation will produce a better result.

If bad contingency cases have such dire consequences, why do so many lawyers take them? Because many lawyers pay more attention to temptation than knowledge.

How Temptation Appears

Potential clients and referring attorneys “sell” contingency fee cases by using the telltale language of temptation. A mentor and friend saved me a lot of misery by sharing the following list of classic contingency fee sales pitches that have nothing to do with a case’s quality.

“All you have to do is file the complaint and the defendant will beg to settle.” This statement implies that the speaker has some inside knowledge of the defendant’s vulnerable circumstances, but it is actually an appeal to greed and sloth. The allure is that this case will give you lots of money with little effort. In reality, if the defendant has acquired resources sufficient to fund a worthwhile judgment, it is unlikely that the mere service of a lawsuit will bring out the defendant’s checkbook.

“The defendant has deep pockets.” Another lure of easy money. Again, most people and entities with deep pockets did not get that way by paying claims without investigating them and challenging their weaknesses.

“My firm cannot handle this case because we discovered we have a conflict.” Many lawyers hear this statement, usually from a well-established attorney from a prestigious firm, to suggest that a case has been vetted as a sure winner but cannot be handled because of the “conflict.” Be careful. Attorneys sometimes use the term “conflict” to include a case’s failure to satisfy their standards of quality. A more candid statement would be “my firm cannot handle this case because it is not as good as the cases we prefer to take.”

“It would be a huge favor if you could handle this case for a friend of mine.” This appeal to friendship frequently means “please take this bad case so I do not have to.”

“The client is difficult, but the ethics rules do not allow you to represent only clients you like.” This appeal to guilt, sometimes self-inflicted, has no basis in the ethics rules. Model Rule 1.2 states that a lawyer’s representation of a client “does not constitute an endorsement of the client’s political, economic, social or moral views or activities.” This does not require attorneys to take cases where misery will outweigh benefits.

“Someone recently obtained a huge verdict in a similar kind of case/against the same defendant.” Similar litigation can give an attorney valuable information about the current state of the law or a particular defendant. Without specific information about how the prior case may relate to the case under consideration, however, a prior verdict is as helpful as the location where a winning lottery ticket was once purchased.

“This case will lead to some good publicity.” Vanity, if we are to believe Al Pacino’s character in The Devil’s Advocate, is the devil’s favorite sin. Lawyers sometimes debate whether taking a prominent but doomed case is a wise investment in promoting a practice. Pursuing a bad case on a contingency fee basis to get publicity is vain foolishness—not an investment—and wrong. Clients do not hire a lawyer for the purpose of making the lawyer famous.

“The client needs to know right away whether you will take the case.” Creating a sense of urgency is a common sales tactic to overcome judgment. Unless there is a real emergency, such as a looming statute of limitations issue or a defendant disposing of assets and fleeing abroad, the urgency is likely designed to prevent the lawyer from taking too hard a look at the case.

All of the foregoing temptations seek to prevent an attorney from focusing on what matters most in a contingency fee case: whether the client has a winning case that can recover enough damages to produce a fee appropriate for the effort. Actual knowledge about a case is what matters.

Knowledge

Investigating facts and law should happen in every business litigation regardless of the fee arrangement. In an hourly case, a lawyer’s factual and legal investigation usually starts after the engagement letter is signed. In a contingency fee case, a lawyer should perform a substantial investigation before deciding whether to accept the case at all. The goal is to reveal fundamental weaknesses in the case that will ultimately doom it or make pursuing it uneconomic.

Know the law. Unless you are thoroughly aware of the most current law related to the claims, research the most recent cases on each theory of recovery. This will reveal the essential elements of the claims and what evidence will be required at trial. Pay particular attention to what elements of the claims require heightened burdens of proof or expert testimony to survive summary judgment or a directed verdict, as this will affect the expense and complexity of the case.

At the very beginning, determine whether damages are clearly too low. If a case involves damages that are clearly too small to produce an acceptable fee, it is best to decline the case promptly and allow the prospective client to look for a lawyer who might find a way to pursue it economically.

Get to know the client and the case. If the case involves sufficient damages, conduct multiple interviews to learn about the client, the relevant business, and the dispute. Try to review information on the client’s webpage (if possible) to avoid wasting interview time on basics. The initial intake interview should discuss the case generally and identify key witnesses and documents. After you gather relevant documents (suggestions for what to obtain are discussed below), conduct follow-up interviews to ask about the documents and how they help or hurt the potential client’s case.

In addition to ascertaining facts, determine whether the client appears honest and trustworthy. Have at least one in-person interview with the potential client. Ask questions that can produce answers that can be checked against independent sources of information. All of this may seem distrustful, but it is exactly what opposing counsel will do after the complaint is filed. It is best to get an early look into how that might turn out.

Review and understand relevant contracts. If the case involves contracts, review and understand them. Listen to the prospective client’s understanding of what the contracts say, but never let that be a substitute for independent review. If a potential party to a case is a business entity or the dispute is within a particular entity, review the governing document, such as the operating agreement in the case of an LLC. These documents (or the relevant corporate law where it fills gaps in the documents) may provide critical information about the rights of your potential client or adversary. It is very difficult for a plaintiff to win a case where the plaintiff has signed a document that permits the defendant to do what the plaintiff is complaining about.

Obtain as much critical email communication as possible. Ask the potential client for any emails discussing the dispute, not just with the potential adversary but with anyone else. Ask the potential client specifically if there are any friends or relatives with whom he or she has exchanged emails related to the dispute. If the answer is “no,” ask again. Do not rely on the potential client’s opinion of what emails are relevant to the dispute. In many business litigation cases, a lawyer spends hundreds of hours bringing an action, opposing early motions, and conducting discovery, only to learn when producing documents that the client has made fatal admissions in unprivileged emails to friends.

Understand the Internet footprint. Obtain as much information as possible about what is on the Internet concerning the case, your potential client, important witnesses, and your potential adversaries. Everything the potential client has said online may become a trial exhibit. Has the potential client blogged about the dispute? Will the client’s statements support the theory of the case? Will those statements make the case more difficult (or more expensive) to win? Has the potential opponent put helpful information on the Internet? Google is a powerful discovery tool. Online sales materials, press releases, and securities filings are treasure troves of information. I successfully opposed a very technical trade secrets case by showing that much of the information claimed to be a trade secret was on the plaintiff’s website and in press releases easily available on the Internet.

Look for a consistent story and theme. Take all of the facts together and determine whether they are consistent. The truth is inherently consistent. Does the chronology of facts revealed in the documentary evidence support the client’s narrative of the events? If the potential client claims to be outraged, did the client express outrage at the time the events in question happened? Is your client attempting now to complain about conduct that he or she long tolerated without complaint? Is your client’s complaint not about the conduct that is presented as the focus of the lawsuit but about personal matters such as being jilted or excluded from a prestigious group within an organization? If the potential client claims not to have known about certain events, does the email support this? People cannot always remember everything perfectly, but serious inconsistencies are causes for concern.

Research criminal and civil litigation involving parties and key witnesses. Except in the unusual case where a business dispute can be decided on the basis of undisputed facts, the outcome will depend on party and witness credibility. Any party that has to sponsor a witness with a criminal conviction or a judgment for fraud will have an uphill climb. If a party has been involved in other civil litigation, PACER and state court records can contain affidavits and other information that can be used as admissions under applicable rules of evidence. You do not want to draft a complaint only to discover that a key factual allegation is contradicted by an allegation made by your client in another case.

Make sure your practice can endure the pain. Conservatively estimate how much time a case will require and evaluate whether your practice can sustain months or years of work without payment. Anticipate and budget expenses. If you practice within a firm, discuss candidly with partners the risks of the case (do not sell the case using the language of temptation discussed above) and decide whether the case makes sense for the firm.

Spend the time necessary to do a good evaluation. The foregoing due diligence sounds like a lot of work. It is. Put things in perspective by considering how much time might be wasted by accepting a case that will ultimately fail. If dozens of hours of due diligence reveal that a contingency fee case would ultimately represent thousands of hours of wasted effort, the time was very well spent.

All of the foregoing may seem gloomy, but remember that Adam and Eve were not supposed to avoid all apples—just bad ones. Due diligence may reveal that a prospective client has a strong case and the potential defendants have much to be worried about. In cases like these, the investigation of whether to accept the case is doubly useful and can be used in the preparation and prosecution of the case itself.

If due diligence persuades you to accept a business dispute case on a contingency fee basis, make sure you review and follow your jurisdiction’s ethics rules for acceptable terms of engagement and documentation of the fee agreement. After that, work hard and enjoy the ride. I have had few professional experiences more satisfying than listening to a jury foreperson read a verdict awarding a client of mine substantial damages in a case in which the client (and I) could have taken nothing.

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